Written by

Dr. Rumki Majumdar

Published

April 24, 2014

Taiwan’s economic recovery picked up some momentum in Q4 2013 and recorded growth of 2.9 percent year over year after registering poor growth of 1.3 percent in Q3 2013. Growth was primarily boosted by a strong revival in domestic demand. Private consumption expenditure and private business investment respectively grew 3.3 percent and 19 percent in Q4 2013, the highest figures in over two years. Growth in both exports and imports was strong as well. Stronger fourth-quarter GDP helped lift annual real GDP growth to 2.1 percent for 2013.

The growth momentum has continued to remain strong in the first couple of months of 2014, as evident from recent economic data. The Taiwan Institute of Economic Research’s business composite indices suggest that manufacturing and service indicators moved up in the first two months of the year. The seasonally adjusted manufacturing composite indicator moved up to 101.31 in February 2014 from 98.8 in December 2013, while the service sector composite indicator improved to 98.05 from 94.10 during the same period. The improving economic outlooks of the United States and Eurozone have helped growth in local industries, including electronics, machinery, textiles, and food services. With Taiwan being a trade-dependent economy, stronger external demand from OECD countries is expected to further benefit these local industries.

In January and February 2014, industrial production and export orders increased 2.7 percent and 1 percent year over year, respectively, supported by gains in electronics products. While the purchasing managers’ index (PMI) for the manufacturing sector fell to 54.7 in February from 55.5 in January, the reading indicates a gradual improvement in business conditions. In addition, manufacturers were more optimistic about future business conditions.1 In February about 48 percent of manufacturers felt that business would improve in the next six months, which was 10 percentage points higher than the previous month’s number. This shows a continuing rebound in local producers’ confidence, which bodes well in terms of capital expenditure spending as well as hiring.

The job market outlook improved as well. According to national statistics published by the government, the unemployment rate was lower in the first two months of 2014 than in the second half of 2013.2 The non-seasonally adjusted unemployment rate touched its lowest level, 4 percent, since June 2008. The pickup in overall economic activities has improved demand for hiring and job creation. There has been a steady improvement in overall wage growth as well. The average real regular earnings in US dollars have been increasing more than 1 percent year over year since the last six months.

Monetary policy fueling financial instability

Consumer price inflation averaged only 0.8 percent in 2013, and it continued to remain low in the first two months of 2014, at 0.4 percent. Excess capacity in the economy and the slow pace of economic growth led to subdued growth in prices. Global inflationary pressures have been mild as well due to lower oil prices and a modest increase in international grain prices. Consequently, Taiwan’s central bank has kept its benchmark rate steady at 1.875 percent since September 2011.

However, low rates have led banks to offer high-valued housing loans without fully complying with the general principles of loan review and credit extension. Some banks have failed to manage risk properly, which has resulted in financial instability. A few banks were also found to use inadequate due diligence when approving and reviewing loans collateralized against land classified for industrial use.

Property prices have soared due to low interest rates, low property tax rates, high banking credit to the housing sector, and a high level of global liquidity that has mostly flowed into Taiwan’s real estate. The financial sector is highly exposed to the real estate sector; total lending of the first to the second accounted for 44.2 percent of total loans at the end of 2013, three-quarters of which comprised mortgages.

The banking sector will likely suffer due to its exposure to the real estate sector.

Policy interest rates will likely remain low this year and may start rising from early 2015. The rise in interest rates, along with the fall in global liquidity (capital outflow as the United States phases out its quantitative easing), could reduce the pressure on property prices. The banking sector will likely suffer due to its exposure to the real estate sector. Falling household wealth, due to declining house prices, and rising interest rates will likely dampen private consumption spending. However, it is expected that the impact of property price corrections will be contained and likely be offset by faster economic growth and an improved trade account.

Future outlook and risks

Economic growth is expected to improve, but at a moderate pace, as the global economy picks up, driving Taiwan’s net export growth. Private consumption spending will likely see a modest rebound due to an improved labor market and high wealth effects. However, any monetary tightening to contain the house price rise will likely impact consumption spending. The improving business outlook may help increase investments in the coming quarters of 2014.

However, the economy is vulnerable to external risks. Global uncertainty and the gradual tapering of US monetary policy easing will likely impact capital flows in the economy. China’s slowdown and financial instability are likely to have a significant impact on Taiwan’s economy due to strong trade and financial linkages. Additionally, the pending Taiwan-China trade agreement for the services sector has led to protests and political tensions in the economy, which may impact Taiwan’s relationship with China. Against this backdrop, the directorate-general of budget, accounting, and statistics forecast that GDP is expected to grow 2.8 percent in 2014, which is higher than the growth estimate of 2013 (2.1 percent).3